Money Obedience

This is our weekly roundup, where we share some interesting posts written by personal finance bloggers we follow. As always, when we list a post in this roundup we stick with our favorite themes: setting up a budget, household expenses, lower debt, and general personal finance topics that can aid in reaching financial goals. We hope that you enjoy the insights of these blog posts!


Setting up a Budget and Household Expenses

Sorting Out What’s Important From The Rest by I’ve Paid For This Twice Already…

Number One Frugality Tip: Don’t Be a Woman by Consumerism Commentary

Tips for Grocery Shopping on a Budget by Bargaineering

How To Handle a Pay Cut (Financially Speaking) by Fiscal Fizzle

Budgeting and Automation: Streamline Your Finances by Five Cents Nickel


Savings

The Reasoning Behind Holding Onto Our Savings by Blogging Away Debt

Avoid These Rookie Mistakes - Overdraft Fees by No Credit Needed


Lower Debt

How to Get Out of Debt by Being Frugal


Financial Goals

An update on goals & a progress report by Living Well On Less


Investing

How To Handle Tremendous Investment Losses by Generation X Finance


Miscellaneous

Living In A Small Home: Pros and Cons of Downsizing Our House by The Digerati Life

Hidden Money Or Why It Pays To Be A Flake by Breaking Even

So here we are, in a recession. Apparently we have been in one for about a year now.

There is plenty of advice floating around about what I should do with my finances now. The advice may come in a little too late for many. So, in this post, I want to discuss two of the “great” suggestions I recently read to prepare (?) for a recession. (1) Get an emergency fund. (2) Lower your debt.

Let’s tackle the emergency fund first. Well, I know, and they advise, that I am supposed to have an emergency fund at any given time. In fact, according to most financial advisors, my emergency fund should cover between three and six months of my monthly expenses. (Yes, I know that’s a lot, but that’s the recommendation.) The idea is that I am supposed to draw on these savings when unforeseen events will make it difficult for me to meet my expenses from my income. What kind of unforeseen events are we talking about? Unemployment from firings or layoffs; health problems from disease or accidents; uninsured loss from fire or theft. Even something like our plain old recession – maybe I keep my job, and I’m in good health, but this year, I won't get as much of a bonus or sales commission. Right now, it might be a little late to put money into an emergency fund – after all, we are in a recession already. But that is exactly why they say it is important to use the good times to prepare for the bad times. The bad times inevitably appear, and it is much harder to "prepare" for the hard times when the hard times have already come. I am glad that I was lucky enough to be able to have some money stashed away already, “just in case.”

Anyway, I face the same problem deciding when I should lower my debt. You see, initially, building an emergency fund and lowering my debt require the same action. I can’t do either unless I first spend (a lot) less than I make. The only difference between these two goals is the way I use my savings in any given month. I need to save money, whether I apply it to an emergency fund or towards my debt. But, just like it is with making an emergency fund, if the economy has already turned sour, it may be a little late for me to focus on lowering my debt. Fortunately for me, I have always been quite concerned about loading up on debt. Sure, I lose out during the bonanza years – I was paying down debts, or making sure I didn’t get any new ones, when it seems that everyone else was doing so much better than I was. I can only imagine that many of the people I know were living so well because they were living on credit, but I can’t be sure. What I do know is that when things take a turn for the worse, I won't have as many worries as the fellows who were riding high during the good years and are paying for it now.

In any case, you might think it’s useless for me to talk about pieces of advice that tell you to get an emergency fund and lower your debt, since you (like me) may very well have hit the hard times already. But, if you’re one of the lucky ones, know that the time is now to get started on these goals, while you can! It is never too late to get a handle on one's financial life. The very first step is to spend less than you make, and today is as good as any to start with that. And just start: whether you use these savings to pay down debt, establish an emergency fund, add to your retirement fund or other financial goals does not matter much. If you’re only getting concerned about your personal finances because we’re in the face of recession, so be it. All of us should continue on this path, for eventually we’ll be in a place where things, once again, will look a lot better.

A good friend of mine is at the age that makes her eligible for full social security benefits at the beginning of next year. She is very much looking forward to that extra income since her current income does not quite meet her living expenses. (She does not have much of a rainy day fund, either.) One of her big monthly expense is her mortgage payment. That’s right. At her age, she is two years into a 30-year mortgage.

Apparently she used to have a pretty good income and – as it happens with just about everyone – her expenses kept rising along with her income. She never had more than a little savings. When she lost her well-paying job, she dipped into her savings to keep up with her expenses. She started spending the little bit she had saved up in a savings account and then dipped into her 401k account, again and again. Eventually she refinanced her house with a cash-out mortgage. Unfortunately, I think it took a long time for her to adjust her expenses downwards. I think that household expenses easily go up with our incomes but it’s not so easy to get them to go down.

Since that first time she got laid off she has had a few jobs with periods of unemployment between them. She has little real savings now except for some still in her 401k, so she is obviously not in a position to retire. Instead she hopes that she can retain her current job as she keeps getting older. Unfortunately, she’s not in a position to save for a time in the future when she will no longer be able to work. Instead, she’s working to keep that mortgage going.

My friend has in recent years been in the unfortunate position that she has had many periods of several months of unemployment. Those many months without an income would deplete even frugal saver’s money stash. There is not much one can do to prepare for such extreme cases of financial hardship. I don’t think it makes much sense to organize your life expecting to be able to survive any kind of calamity. You would lose out on enjoying many good years as you deprive yourself of joy in expectation of “something really bad happening”. Neither, then, would you take certain risks like furthering your education with a student loan – a very good investment to make in yourself in the expectation of getting a better paying job.

Anyway, I am talking about my friend’s financial situation just to remind you and myself that being prepared for financial hardship is an essential feature of good financial planning. Having a rainy day fund is one of the reasons why I am pretty vigilant with our family finances. In all honesty, I am not so sure that my family could withstand as many months of unemployment as my friend has experienced – I’m fairly certain that we’d no longer be in good financial shape after as many months without an income. Fortunately, my husband and I are lucky enough to be able to live on one of our incomes if one of us lost our jobs, but we would encounter serious trouble if we lost both incomes at the same time and we faced lengthy periods of unemployment where neither one of us could find a job that replaces our current incomes.

Link: http://www.time.com/time/business/article/0,8599,1842123-6,00.html

Today I was reading “How Financial Madness Overtook Wall Street,” an article on time.com ( http://www.time.com/time/business/article/0,8599,1842123-6,00.html ). The last paragraph ends like this: “Coping in this new world will require adjustments by millions of Americans. We all will have to start living within our means — or preferably below them.”

This, unfortunately, is the harsh reality with which we each will have to come to terms. It will be a new experience for many of us. If you spend too freely for a long period of time, there will at some point be a day of reckoning. Eventually any debt has to be paid back. When we pay debt back, we spend less than we earn, since some of our income is used to pay back the debt we ran up for purchases we made in the past. In other words, we have to tighten our belts. As the Times article insinuates, on average we will not be able to live as well as we have in the recent past. This is as true for a country’s state of financial affairs as it is for the average family or individual.

The authors of this article recommend that the best way for an individual or family to cope with this kind of scenario is to have one’s own personal finances in good shape. This means, for example, that debt should be kept at a reasonable level. Ideally, you should be able to pay it off easily with your current income. However, even when your financial situation is in good order, you still have to hope that the imminent recession won’t be so deep and/or so long that you lose your job and that your income shrinks significantly. Needless to say, a recession can open up a whole new set of problems. Just in case, you’d want to have enough money in you emergency cash account. So let’s do our best to keep enough money in our emergency cash account, and hope that we get through the tougher economic times that we are about to face. My best wishes to you all!

How much emergency cash is enough?